Blog: The government must adopt reliable building regulations to fix the broken insurance market – Insurance POST

In December 2022, Director of the RFA Mick Platt wrote for Insurance POST about why the Government needed to adopt reliable building regulations to fix the broken insurance market. The original piece can be read here.

With the publication of report on insurance for multi-occupancy buildings earlier this year, Mick Platt, director at the Residential Freeholder Association, considers the government failure to adopt reliable building regulations which led to severely broken insurance market.

In September, the Financial Conduct Authority published its much-anticipated report which reviewed the buildings insurance market for multi-occupancy developments, having been commissioned by Michael Gove, the former Secretary of State for Levelling Up, Housing and Communities, earlier this year.

In its report, the financial watchdog set out a range of recommendations designed to improve transparency for leaseholders about the price of their insurance, while giving leaseholders greater protection from increasing insurance prices.

Remembering Grenfell

The FCA concluded that there has been a reduction in the supply of insurance for multi-occupancy buildings since the 2017 Grenfell fire tragedy, with swathes of insurers leaving the market and a reduced appetite to take on new business among others due to the falling profitability of business.

Indeed, the changes to the insurance market are stark. The number of insurers supplying insurance to multi-occupancy buildings has reduced significantly over the past few years, removing the competitive pressure on insurers to lower prices. This has meant that thousands of leaseholders have had to endure the difficulties of living in buildings with known cladding issues while still facing a dramatic hike in the cost of their insurance.

The report makes for interesting reading, even if some of the content is contradictory. However, throughout the report, one thing is clear – the insurance market is severely broken.

To understand why, it’s important to recognise that the market has succumbed to a perfect storm in recent years. Insurers have traditionally relied upon building regulations to determine which buildings are safe and which are not. However, since the Grenfell tragedy, it has become clear that these regulations were not fit for purpose – meaning that some buildings have been signed off as safe despite actually having fire safety defects.

If the shortcomings of building regulations had been clearer earlier, then premiums would have been much higher, much sooner. And although there is widespread belief among leaseholders that premiums will reduce after remediation, the scope of the works carried out will be subject to stringent scrutiny by underwriters, with only proven and complete clean bills of health qualifying.

Once again, when it comes to the issue of building safety, the UK government’s failure to regulate efficiently is causing issues. Flawed Whitehall policy, combined with rising interest rates and claims-cost inflation has led to hard market rates, where premiums are sky-high, and many insurers would rather walk away than offer a solution that involves a significant risk to their balance sheet.

Lack of transparency

The FCA report also states that there is a lack of transparency from insurers and building owners, which causes considerable distress for leaseholders. In fact, there is a presumption among the leaseholder community, which has been exacerbated by commentators promoting inaccurate theories, that leaseholders’ costs are rising due to insurance brokers and freeholders taking high levels of commission. This has raised questions within the industry about the future of the current insurance and freehold models – the FCA are in danger of further complicating an already distressed marketplace.

However, it is important to note that institutional freeholders have a certain amount of bargaining power within the market, first due to the size of their portfolios, and second because they are able to establish professional relations with insurers by demonstrating a clear understanding of the risk, they are asking the insures to protect.

As a result, these freeholders are often able to lower premiums for their leaseholders. This would simply not be possible in a commonhold system – the logistics of getting hundreds of individual residents to come together and replicate freeholders’ buying power and expertise to get cheaper insurance in such a hard market is fanciful.

On the back of the FCA report, many leading insurers and brokers are reviewing their business relationships to only work with ‘capable’ buyers, which a worrying message for the resident-led purchasers.

So, what is to be done? First, instead of being fixated by these issues, commentators must focus on realistic, achievable solutions to fix the market.

A good example of this is the FCA’s recommendation that the UK government stands as the insurer of the last resort for a new FireRe pool system of insurance, aimed to limit the risk to individual insurers posed by high fire-risk buildings while reducing the price of insurance for these buildings. This is a sensible solution, and it is one that members of the Residential Freehold Association have previously pitched to various All-Party Parliamentary Groups and cross-party MPs.

Building better regulations

However, the UK government must go further than this to fix the market. Ministers must put in place reliable building regulations and a proper regulatory system to ensure the buildings of the future are safe – something that does not currently appear to be a priority. This will reassure insurers and create a better market that can withstand long-term pressure. This is the only way that insurers can have confidence in the buildings they are insuring.

As a representative organisation for the UK’s largest professional freeholders, the RFA will continue to work with insurers, building owners and leaseholders across the industry to ensure that the government adopts reliable building regulations and puts a proper regulatory system in place – only then will insurers be able to offer affordable cover for leaseholders of multi-occupancy buildings.